Why are IBRC’s operating costs so much higher than NAMA’s?

The view on here is that IBRC will eventually be merged with NAMA; it may take some time – months or years – but it is complete nuts to maintain two 100% state-owned agencies doing precisely the same job – IBRC might still be classed as a bank, but for the purposes of the following it is regarded as a state agency whose sole shareholder in the Minister for Finance, Michael Noonan.

A merger might be too challenging a task in 2012, but by 2020 when both NAMA and IBRC are scheduled to wind down, it seems implausible that we would still have two agencies with an inefficient duplication of costs, dysfunctionally competing with each other rather than combining their talents to take advantage of best individual practices and to compete with non-state-owned asset management companies.

But which agency should take the senior role in any merger?

You might start out by asking which agency is presently doing the better job in managing its assets, but sadly neither NAMA nor IBRC publishes sufficient information to allow you make a reliable overall assessment. You can glance off some peripheral aspects of both agencies’ published accounts, like non performing loans, and you might conclude IBRC is doing a worse job than NAMA because the rate of deterioration in its loans is worse than NAMA’s. You might also note the €247m profit delivered by NAMA in 2011 and compare that to the €935m loss at IBRC, but the view on here, is that both agencies are hiding a veritable hornets nest of problems in the way they account for loan impairments and NAMA’s €235m tax credit in 2011 doesn’t fool anyone. But overall, you just don’t have enough information to meaningfully conclude which agency is doing better with managing its assets.

And what about costs? NAMA and IBRC are managing loan portfolios of a similar magnitude, though NAMA’s net-of-provisions total of €26bn is greater than IBRC’s €19bn. What does stand out is the fact that NAMA’s operating costs are less than half those of IBRC’s – in 2011 NAMA racked up €128m of operating costs (see above extract from the 2011 annual report) compared to €320m at IBRC (see below extract from the 2011 annual report). For 2012, NAMA has published a forecast of its costs at €194m for this year, and IBRC’s actual H1,2012 costs of €129m indicate that its total costs for 2012 will be down from 2011.

There might be many reasons for the disparity, but there is a sneaking feeling on here that NAMA’s CEO Brendan McDonagh is better at keeping a lid on costs, though he has the advantage of building an asset management company from scratch whereas IBRC’s CEO Mike Aynsley inherited a company in late 2009 which had well-documented poor lending practices and may well have had poor cost control as well, with legacy contracts which couldn’t be avoided. Also, the fact that NAMA’s budgeted costs for 2012 declined from €242m in its projections last September 2011 to €194m this February 2012, may have been due to rigorous cost control, but past experience tells us that NAMA just didn’t scrutinise the costs sufficiently.

In trying to compare operating costs between NAMA and IBRC, what does become obvious is that we have far greater transparency from NAMA. Remember that NAMA produces quarterly reports and accounts, as well as an annual statement and projection of costs, not to mention an annual report. NAMA is summoned to Oireachtas committees every six months (on average) and if you review parliamentary questions, you’ll see that NAMA is subjected to far more frequent and intrusive scrutiny. Despite both IBRC and NAMA being 100% state-owned, doing the same job with similar employee numbers and the same ballpark value of assets, the truth is that we have very little scrutiny of IBRC’s operations, and this would be another reason to merge the two agencies together.

Last week when IBRC reported its results for the first six months of 2012, it claimed that it had undertaken a “cost management exercise” which has led to savings. There is no obvious mechanism at present whereby best practice in NAMA and IBRC is being shared. Our doddering Department of Finance is unlikely to have the nous to examine costs across both agencies, but commonsense tells us that one agency or the other will have better practices or contracts in specific areas. But given the sensible likelihood of an eventual merger, perhaps we can prod the powers that be to start examining costs now – with a combined total of operating costs in 2012 of €400-500m, it would be astonishing if savings couldn’t be achieved.

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I would be afraid that the amalgamation of NAMA and IBRC would result in a behemoth that would lumber on far beyond the date when NAMA is supposed to be wound up. As Hercules discovered, this particular Cerberus might prove difficult to kill off.

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